It is known that the route of data flow within the automatic exchange of financial account information under the Common Reporting Standard (CRS) depends on tax residence of an account holder, which is to be declared by a customer in self-certification bank forms. The recipient of the information about a foreign bank account of a person (or an account of a passive company controlled by such person) will be the tax authority of the country in which an account holder (or a beneficiary of a passive company – account holder) is a tax resident.
On 19 February 2018 the Organization for Economic Cooperation and Development (OECD) published a consultation document named “Preventing abuse of residence by investment schemes to circumvent the CRS”. In this document the OECD has expressed its concerns about the potential opportunity of use residence (or citizenship) obtained in exchange for investment to circumvent the requirements related to the automatic exchange.
It is noted that the programs for obtaining residence (permanent residence permit) of citizenship by way of investment into local economy that exist in some countries, are in demand for a number of legitimate reasons (visa-free travelling, political stability etc.). Moreover, such programs as a rule do not offer tax residency as such, but just grant the right for permanent residence or citizenship. Even if tax residence can be obtained together with the aforesaid, it does not by itself affect the current tax residence of a person in a particular country.
The problem, according to the OECD, is the opportunity to manipulate with the information about the place of tax residence. Persons who use the said residence/citizenship by investment schemes may declare to the bank the inaccurate or incomplete tax residence information (so that the information within the automatic exchange goes to a “safe” jurisdiction for that person, or falls outside the scope of the automatic exchange because of non-participation of such jurisdiction in it).
Such situation can take place where an individual does not actually reside in the relevant jurisdiction, but claims to be a resident in it for tax purposes (providing the bank with the relevant supporting documentary evidence – tax residency certificate, passport, utility bill etc.).
To determine whether a particular scheme for obtaining residence or citizenship presents a high risk of being used to circumvent the automatic exchange, OECD lists the following criteria:
- the scheme imposes no (or minimal) requirements to an applicant to be physically present in the jurisdiction, or provides no checking of their compliance;
- the scheme is offered by low-tax or tax-free jurisdictions, or by jurisdictions not participating in CRS automatic exchange or not exchanging information with a particular jurisdiction or a group of jurisdictions.
The OECD draws attention to correct application of the existing CRS due diligence procedures related to specifying tax residence and outlines the following recommendations to banks:
- the requirement to have a real, permanent physical residence address (and not just a PO box or in-care-of address) for the application of the residence address rule and the necessity to confirm the presence of a real, permanent physical residence through appropriate documentary evidence;
- the requirement to instruct account holders to include all jurisdictions of tax residence in their self-certification;
- the rule that financial institutions cannot rely on a self-certification or documentary evidence if they know, or have reason to know, that such self-certification or documentary evidence is unreliable, incorrect or incomplete.
In view of the aforesaid, clients are recommended to take into account that the OECD recommendations (resulting from the discussion of the said issue) can cause additional checks by banks of tax residency information declared by clients in bank forms for CRS purposes.